The Journal of Finance

How Costly is Financial (Not Economic) Distress? Evidence from Highly Leveraged Transactions that Became Distressed

Published: 12/17/2002   |   DOI: 10.1111/0022-1082.00062

Gregor Andrade, Steven N. Kaplan

This paper studies thirty‐one highly leveraged transactions (HLTs) that become financially, not economically, distressed. The net effect of the HLT and financial distress (from pretransaction to distress resolution, market‐ or industry‐adjusted) is to increase value slightly. This finding strongly suggests that, overall, the HLTs of the late 1980s created value. We present quantitative and qualitative estimates of the (direct and indirect) costs of financial distress and their determinants. We estimate financial distress costs to be 10 to 20 percent of firm value. For a subset of firms that do not experience an adverse economic shock, financial distress costs are negligible.

Characteristics, Contracts, and Actions: Evidence from Venture Capitalist Analyses

Published: 11/27/2005   |   DOI: 10.1111/j.1540-6261.2004.00696.x

STEVEN N. KAPLAN, PER STRÖMBERG

We study the investment analyses of 67 portfolio investments by 11 venture capital (VC) firms. VCs describe the strengths and risks of the investments as well as expected postinvestment actions. We classify the risks into three categories and relate them to the allocation of cash flow rights, contingencies, control rights, and liquidation rights between VCs and entrepreneurs. The risk results suggest that agency and hold‐up problems are important to contract design and monitoring, but that risk sharing is not. Greater VC control is associated with increased management intervention, while greater VC equity incentives are associated with increased value‐added support.

Private Equity Performance: Returns, Persistence, and Capital Flows

Published: 08/12/2005   |   DOI: 10.1111/j.1540-6261.2005.00780.x

STEVEN N. KAPLAN, ANTOINETTE SCHOAR

This paper investigates the performance and capital inflows of private equity partnerships. Average fund returns (net of fees) approximately equal the S&P 500 although substantial heterogeneity across funds exists. Returns persist strongly across subsequent funds of a partnership. Better performing partnerships are more likely to raise follow‐on funds and larger funds. This relationship is concave, so top performing partnerships grow proportionally less than average performers. At the industry level, market entry and fund performance are procyclical; however, established funds are less sensitive to cycles than new entrants. Several of these results differ markedly from those for mutual funds.

Are CEOs Different?

Published: 03/09/2021   |   DOI: 10.1111/jofi.13019

STEVEN N. KAPLAN, MORTEN SORENSEN

Using 2,603 executive assessments, we study how CEO candidates differ from candidates for other top management positions, particularly CFOs. More than half of the variation in the 30 assessed characteristics is explained by four factors that we interpret as general ability, execution (vs. interpersonal), charisma (vs. analytical), and strategic (vs. managerial). CEO candidates have more extreme factor scores that differ significantly from those of CFO candidates. Conditional on being considered, candidates with greater general ability and interpersonal skills are more likely to be hired. These and our previous results on CEO success suggest that boards overweight interpersonal skills in hiring CEOs.

The Success of Acquisitions: Evidence from Divestitures

Published: 03/01/1992   |   DOI: 10.1111/j.1540-6261.1992.tb03980.x

STEVEN N. KAPLAN, MICHAEL S. WEISBACH

This paper studies a sample of large acquisitions completed between 1971 and 1982. By the end of 1989, acquirers have divested almost 44% of the target companies. We characterize the ex post success of the divested acquisitions and consider 34% to 50% of classified divestitures as unsuccessful. Acquirer returns and total (acquirer and target) returns at the acquisition announcement are significantly lower for unsuccessful divestitures than for successful divestitures and acquisitions not divested. Although diversifying acquisitions are almost four times more likely to be divested than related acquisitions, we do not find strong evidence that diversifying acquisitions are less successful than related ones.

The Valuation of Cash Flow Forecasts: An Empirical Analysis

Published: 09/01/1995   |   DOI: 10.1111/j.1540-6261.1995.tb04050.x

STEVEN N. KAPLAN, RICHARD S. RUBACK

This article compares the market value of highly leveraged transactions (HLTs) to the discounted value of their corresponding cash flow forecasts. For our sample of 51 HLTs completed between 1983 and 1989, the valuations of discounted cash flow forecasts are within 10 percent, on average, of the market values of the completed transactions. Our valuations perform at least as well as valuation methods using comparable companies and transactions. We also invert our analysis by estimating the risk premia implied by transaction values and forecast cash flows, and relating those risk premia to firm and industry betas, firm size, and firm book‐to‐market ratios.

Private Equity Performance: What Do We Know?

Published: 03/27/2014   |   DOI: 10.1111/jofi.12154

ROBERT S. HARRIS, TIM JENKINSON, STEVEN N. KAPLAN

We study the performance of nearly 1,400 U.S. buyout and venture capital funds using a new data set from Burgiss. We find better buyout fund performance than previously documented—performance has consistently exceeded that of public markets. Outperformance versus the S&P 500 averages 20% to 27% over a fund's life and more than 3% annually. Venture capital funds outperformed public equities in the 1990s, but underperformed in the 2000s. Our conclusions are robust to various indices and risk controls. Performance in Cambridge Associates and Preqin is qualitatively similar to that in Burgiss, but is lower in Venture Economics.

Should Investors Bet on the Jockey or the Horse? Evidence from the Evolution of Firms from Early Business Plans to Public Companies

Published: 01/23/2009   |   DOI: 10.1111/j.1540-6261.2008.01429.x

STEVEN N. KAPLAN, BERK A. SENSOY, PER STRÖMBERG

We study how firm characteristics evolve from early business plan to initial public offering (IPO) to public company for 50 venture capital (VC)‐financed companies. Firm business lines remain remarkably stable while management turnover is substantial. Management turnover is positively related to alienable asset formation. We obtain similar results using all 2004 IPOs, suggesting that our main results are not specific to VC‐backed firms or the time period. The results suggest that, at the margin, investors in start‐ups should place more weight on the business (“the horse”) than on the management team (“the jockey”). The results also inform theories of the firm.

Which CEO Characteristics and Abilities Matter?

Published: 05/21/2012   |   DOI: 10.1111/j.1540-6261.2012.01739.x

STEVEN N. KAPLAN, MARK M. KLEBANOV, MORTEN SORENSEN

We exploit a unique data set to study individual characteristics of CEO candidates for companies involved in buyout and venture capital transactions and relate these characteristics to subsequent corporate performance. CEO candidates vary along two primary dimensions: one that captures general ability and another that contrasts communication and interpersonal skills with execution skills. We find that subsequent performance is positively related to general ability and execution skills. The findings expand our view of CEO characteristics and types relative to previous studies.

The Effects of Stock Lending on Security Prices: An Experiment

Published: 04/09/2013   |   DOI: 10.1111/jofi.12051

STEVEN N. KAPLAN, TOBIAS J. MOSKOWITZ, BERK A. SENSOY

We examine the impact of short selling by conducting a randomized stock lending experiment. Working with a large, anonymous money manager, we create an exogenous and sizeable shock to the supply of lendable shares by taking high loan fee stocks in the manager's portfolio and randomly making available and withholding stocks from the lending market. The experiment ran in two independent phases: the first, from September 5 to 18, 2008, with over $580 million of securities lent, and the second, from June 5 to September 30, 2009, with over $250 million of securities lent. While the supply shocks significantly reduce market lending fees and raise quantities, we find no evidence that returns, volatility, skewness, or bid–ask spreads are affected. The results provide novel evidence on the impact of shorting supply and do not indicate any adverse effects on stock prices from securities lending.